Aug 29, 2006

Thriving Somali Business and the Need for Government

There has been a discussion – or a debate if you like – about Somalia's economy without a state. Some interesting studies about Somalia’s economy since the fall of Siad Barre’s regime show that Somalia's economy is better off with the absence of predatory government. What does that mean though? Does it mean that Somalia doesn't need a government? And if does need a government, what kind of government?

Road to Anarchy
Somalia has been without an central government since Siad Barre’s regime was overthrown in 1990. Two regions in the north west and north east have setup regional governments, Somaliland and Puntland respectively. The region south of Galkayo city had no government or central authority for the last 15 years, but warlords and tribal chiefs filled the vacuum. Finally, the Islamic Courts Union chased away the warlords and are now in control of most of Southern Somalia.

There were numerous attempts by the international community to create a central government for Somali and so far, they’ve all failed (there’s now a weak government that seems to follow the footsteps of its predecessors).

Better Off Stateless
Somalis are better off under anarchy than they were under government argues Peter T. Leeson in his paper “Better off Stateless”. The reason for this development is “the absence of a predatory state” which limited the entrepreneurship of the Somali people for decades. Somalia’s economy today is all private business and ownership. Researchers from World Bank agree with this conclusion and add inventiveness as another factor for this trend. Tatiana Nenova and Tim Harford in the “Anarchy and Invention discuss how private enterprise is succeeding without a government. Somali entrepreneurs are using “foreign jurisdictions or institutions to help with some tasks”, for example all hawala business are registered in Dubai. Somali business use “networks of trust to strengthen property rights” such as the Somali tribal system.

The hawala system (money transfer) is a the most important sector in Somalia. It started in the late 1980s in response to the governments restrictions on banking and foreign currency trade. But the massive growth came after when the only method a Somali can send money back home was through hawala. It’s a system that’s all based on trust, you don’t need address; just the name of the person, location and tribe are enough for him/her to receive the money the next day almost anywhere. Money sent through hawala to Somalia is estimated at $1 billion a year, I think it’s even more.

In a visit to Dubai where most hawala businesses are based, I saw first hand how ingenious these guys are, they use MSN Messenger for communication between representatives in different countries. Reps from around the world login to MSN Messenger and share information on exchange rates, follow up on transactions and so on. The actual transaction is also done through MSN Messenger by simply requesting a rep. to pay X amount of money to recipient Y and they sort the accounting later. hawala companies now provide an ever growing range of banking services and are investing in other sectors of the economy.

One advantage Somalis traders have is mobility, they don’t mind moving to wherever there’s business. I know a businessman who started his business in Kenya, later had a branch in Dubai for wholesale and another branch in Indonesia mainly for manufacturing. He told me he was considering to move to China because it’s cheaper. Other Somalis trade in real estate, textile, logistics, retail, telecomm and oil throughout Africa. In fact Somalia has one of the best telecomm in Africa.

Does Somalia Need a Government?
Somalis for most of its knows history – four thousand years or so - didn’t have a central government, instead they were organized around tribal sultanates and kingdoms. Islam came to Somalia peacefully so there’re no recorded conflicts with other muslim entities. Somali tribes however, united whenever they faced a common threat such as the Portuguese or the Ethiopians. The question is whether such a system is applicable today.In his book, the Law of the Somalis Michael van Notten describes the Somali tribal traditions, the customary law and how it replaced the role of the government in creating and maintaining stability. He argues that imported forms of government where people are divided into rulers and the ruled will only lead to anarchy in Somalia, the solution he say to cultivate the Somali customary law and economy. Indeed Somaliland, Puntland and Islamic Courts Union are all formed by different tribes and they’ve all created stability in their regions.

However, I take the view that Somalia needs a government, one that’s small and decentralized. The tribal system is important and its role has to be recognized and defined in the constitution (doesn’t have to be a major role). I think a government is required to provide and maintain public services such as health, education, resource management and the overall welfare of the citizens.

Somalis – especially the business community – seem to agree that a government is the solution to the Somali problem. In my assessment based on my conversation with Somalis, the overwhelming majority agree on the need for a government. There’s a feeling of instability among ordinary citizens even in places like Somaliland and Puntland.

I also think any future government have to be created by Somalis and adopted for the Somali situation. So far, the peace talks and the attempts to form a Somali government only resulted in weak governments, made up of people with dubious backgrounds (i.e. warlords and officials of Siad Barre’s regime). Also the political system(s) suggested doesn’t take into account the Somali culture and traditions. For example, in the last two governments, there was a President and a Prime Minister from Hawiye and Darood (one from each), the parliament was also divided on tribal basis. In the last two governments there was conflict between the two men (President & PM) so whoever bribed the parliament better got a vote of no confidence for the other (voting not based on tribes). On the other hand, you’ve the clan elders with tremendous influence – and power - in the society but aren’t recognized in the constitution. So you always end up with a deadlock situation and more often than not an increased likelihood of conflict.

Most of all, I’m fearful of the incompetence of those involved in politics in Somalia today. Three groups dominate the political scene; the warlords, corrupt former Siad Barre regime official and clan representatives. They’re all distrusted by the majority of the Somali people.

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Black River Eagle said...

This is a very fine article (post) Abdurahman, very informative. I believe that a central government empowered by the will of the people and a constitution and the rule of law are indespensable for a modern state. It is great that so many Somali businesspeople have been able to startup and operate without a central government in place, but just think about the loss of revenues from taxes and duties and fees that the country has lost over the past X decades because these businesses have been forced to operate from abroad and/or payoff dubious individuals within the country in order to do business there. Would you care to put a price tag on those lost revenues? Billions of $$$ ???

The country's infrastructure and public services (health, transportation, education, communication, security, etc. etc.) that the Somali people so desperately want and need are either non-existent or in need of repair as a result of that loss of revenue... and of course as a result of the destruction caused by the ongoing conflicts between tribes and clans and warlords that plague the poor country to this very day.

Another argument for the need for a central government is how do other countries interact and support Somalia when no central authority is in charge? How would Somalia be able to receive needed development assistance and make trade and security agreements with neighboring countries and the wider world?

In my opinion yes Somalia needs a central government, and Somalia needs leaders (political, business, and civic) that have the interests of the Somali people front-and-center in everything that they do. This is what has been missing in Somalia for so very long, national leadership that is acceptable and respected by all citizens of the country and the world at large.

I'll get back to our open comment thread re: Lebanon at Chippla's blog later. Super busy at the moment. Cheers!

Chippla Vandu said...

Now this is one very interesting and informative write-up. I learnt a great deal from it. Though I had previously heard of the hawala money transfer system, I hadn’t a clue how it operated. It’s also good to see that despite the lack of a central government, the Somali telecom sector is doing fairly well.

However, in agreement with both yourself and Black River Eagle, I do think that Somalia desperately needs some form of central government. This becomes very important when Somalia needs to deal with the outside world.

While Somalia appears to be working to a certain extent, the only functional parts of its economy appear to be those driven by entrepreneurs (business people). Entrepreneurs are only interested in areas of the economy that bring huge profits into their pockets. This means that areas such as public healthcare and education suffer without the presence of a central government.

Richard said...

I enjoyed you article. In the US a underground economy flourishs. but
think you need a government to establish value of currency and maintain a criminal justice system.
are the somali people better off or is there still reports of starving people? I know a triving economy will raise all boats like the tide. I hopr this is so in Somali
Enjoy your blog

Abdurahman Warsame said...

Somali people had an oppressive, backward government for a long time so the war - with it's ills - led to fundamental changes in Somali culture. Commerce and trade flourished because of the absence of corruption and nepotism. Another positive change was the development of cities, Somalis invested and built Mogadishu only; after the war, people went back to their cities of origin and invested in them.

Outside of Somalia, particularly in Africa, Somalis are one of the strongest business communities. All these changes were possible because of the absence of restriction and counter-productive measure by the government.

Future Somali governments should focus on public infrastructure/services which can only be maintained by a government and to attract Somali entrepreneurs from inside and outside the country by maintaining minimum market intervention similar to what's now in place.

Anonymous said...

yes Somali business's are doing well thanks to Dubai main financial ally. On the other hand there more Somalis starving than doing business. The fact is that powerful tribes are dominating the market and you must be willing to do business them in return for protection. the business men of Somalia are paying large amount of money for arms to their tribes.

There have been positive changes but not for the majority of Somalians. any ways it is too complicated the situation in Somalia........

Anonymous said...

Those businesses in Somalia that are successful should consider expaning to neighbouring countries. This will enable them to access more potential customers and hence make greater profits. This is as Somalia's population is estimated at around 8 million people, many of whom are nomads.

Otherwise these companies should diversify and perhaps enter different markets altogether as a branch of their existing companies. They could enter industries offering different products to different markets (within Somalia). They are part of the few who have the financial capital and knowledge to further develop the country's private sector, which through taxes helps government(?).